Quarterly CPI analysis: RBA faces a tough choice amid mixed economic signals and global uncertainties

The latest figures from the Australian Bureau of Statistics (ABS) reveal an annual drop in the Consumer Price Index (CPI) to 2.4 per cent in December, down from 2.8 per cent in the September quarter. This is encouraging as it is within the RBA's target range, though the RBA is more focused on underlying inflation. 

The good news is that annual underlying inflation has come down to 3.2 per cent, which is just above the RBA’s target range. This is also an improvement on the RBA's December forecast of 3.4 per cent and may well call the RBA to action next month. 

The labour market is another focal point in this evolving economic landscape. Even though unemployment is low and steady at 4 per cent, there seems to be little impact on inflation. The RBA typically expects inflation to accelerate when unemployment is below 4.5 per cent. However, this relationship has been questioned in recent years. There is a good chance that the RBA will revise down its unemployment rate forecast in February, acknowledging that a lower unemployment rate may be sustained in the long run. 

The door to rate cuts is open 

If we focus only on the domestic economy, we predict the door will now open for the RBA to announce its first rate cut in over four years in the upcoming February meeting. However, we may need to wait another quarter for the RBA to be satisfied that underlying inflation is on track to reach and remain within the target range of 2 to 3 per cent. 

Taking a broader focus, looming global uncertainties could thwart optimistic domestic trends. Australia's dependence on resource exports and crucial trade relationships, especially with China, heightens the stakes. The new Trump administration's tariff policies could lead to increased import costs and supply chain disruptions, and there are fears these factors could offset positive developments in Australia’s economy. 

As we stand at this crossroads, the RBA might consider these uncertainties in its latest forecasts and take a more cautious approach. While there are positive indicators domestically, the broader international landscape presents significant inflationary risks to monetary policy. 

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